tennisguru

Wrong. Your math is correct but it doesn't match anything that people do in reality, because your example assumes that someone is going to invest less into a Roth than a traditional. To translate your idea to reality would mean that you would put 18k into a traditional but only 13.5k into a Roth. In that case yes, it's a compete wash either way. You say that the growth money is smaller with a Roth, but that's only true only if you actually invest less money into the Roth. The truth is if you max out any retirement vehicle it will grow to the exact same amount regardless of whether it's in a traditional or a Roth. People don't put 18k into a traditional but only 13.5k into a Roth, they max it out either way. Investing 18k into a Roth is like investing 24k pretax. A true comparison looks at pretax vs pretax. Please explain how 18k pretax is better than 24k pretax?

crewdawg

WRT, traditional vs roth...it's a tough call and is really a crapshoot. Who knows what taxes will look like in the future, look back at the history of taxes in the 1950s-1970 and you'll see some ridiculously high tax rates. Will we end up back there...who knows? Heck they may even try to tax Roth monies down the road... If that happens, you might be better to invest in gold, guns and bullets.

Like others have said, I like the Roth IRA option because ease of retirement/estate planning. I figure I'll have quite a bit of traditional 401k via the companies contributions, so I'd like to have some Roth IRA money. Also, I plan to plus up my IRA money so I can use a SDIRA to invest in real estate. I don't like the idea of having so much of my money in the stock market, so this is my way of diversifying.

This is great stuff.


Likely because it's open to multiple avenues of funding. Also if you look up the history of the 401k, it was never really meant to be what it is today. I listened to an interview of one of the creators who isn't exactly thrilled with what 401k has morphed into. He had envisioned it to be a supplement to your retirement, which is I'm guessing is why they put such a "low" limit.

Tummy

If you invest $18,500 in a traditional 401k, you don't pay taxes on the $18,500, so it only costs you $18,500.

Let's assume you are in the 35% tax bracket.

If you invest $18,500 in a roth 401k, you first have to pay taxes on the $18,500, so you only get to invest $18,500 * 0.65 = $12,025. Investing $18,500 in a roth 401k costs you $18,500 / 0.65 = $28,461.54.

If you want to compare apples to apples, you would have to look at investing $18,500 in a roth 401k vs. investing $18,500 in a traditonal 401k and an additional ($24,461.54 - $18,500) * 0.65 = $3,875 in a non tax advantaged account.

Once again, it is critically important that people understand this, and it is apparent that many in this thread do not understand this simple math.

Tummy

Fair enough. I chose the 12% rate rather arbitrarily.

Let's assume a married pilot makes $339,000 per year. His top marginal tax rate is 24%. ($315,000 + $24,000 = $339,000)

It is important to note that the first dollar contributed to a traditional 401k gets him the full 24% income tax deduction, and the first $24,000 taken out of a traditional 401k in retirement is taxed at 0%. The next $19,050 ($24,000 + $19,050 = $43,050) is taxed at 10%. The next $58,350 ($43,050 + $58,350 = $101,400) is taxed at 12%. The next $87,600 ($101,400 + $87,600 = $189,000) is taxed at 22%.

$189,000 / 0.04 = $4,725,000

That pilot's tax burden in retirement from traditional 401k distributions is $24,000 * 0 + $19,050 * 0.10 + $58,350 * 0.12 + $87,500 * 0.22 = $28,157.

$28,157 / $189,000 = 14.9%

Tummy

Fair enough. My rates were rather arbitrary. I think I gave a better response to tennisguru the second time.

It's worth pointing out that you can use traditional to roth conversions in retirement to decrease your tax liability.

To the more general point of people talking about retiring with $5M or more, unless you have a strong desire to leave a bequest (which I completely understand) or you want to live an extremely lavish lifestyle in retirement (to each his own), I don't understand the point of working to build up that large of a nest egg.

I invest over half of my net income, and I feel like I have fantastic quality of life. My current plan is to either retire completely, or bid right seat of a widebody and fly one trip a month once I hit $2.5M. I can live a life of luxury on a beach in Thailand for less than $101,200 a year.

Sputnik

Here's an even more basic question, how do I set up a 401a with Fidelity?

mispoken

Valid arguments and this is certainly Personal preference. My goal is to reach that point as well by 55 and then go part time on a wide body, but to support this, id rather have a bit more of a nest egg. In reality, I’ll have to make it last for 30 years, but 2.5 mil is certainly able to support that. I like to think that an early retirement is in my future, but really it’s about having the option. Whether or not I exercise that option remains to be seen.

Gunfighter

First make sure you know WHY you are doing it and have an understanding of the rules and tax implications. The option is already there in the Delta plan. Login to your Fidelity account - Contributions and designate how you want the money split. There is a 401a section in the mix of options. Once the money is in there, you call Fidelity, move to Traditional IRA and convert to Roth, assuming that is your plan.

mispoken

No need to set it up, it’s already part of the DPSP. You can divert funds from your paycheck to the 401a via the website. However, I highly recommend you call Fidelity and spend some time on the phone with them so you are completely clear on how to conduct this slight of hand. Let them walk you through it, and possibly set it up to begin with. I managed to screw this up when I first did it. It didn’t have any real negative implications other than adding several extra steps, but I learn best that way :-).

mispoken

No need to move to a traditional then Roth. Since this is after tax money, it can go right from 401a to Roth IRA. This conversion doesn’t count towards your Roth 401k max, either.

The TIRA to Roth is what you need to do to make your contribution to the Roth IRA outside of the DPSP ($5500/yr or $6500 of over 50)